This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the top of any article.

Tax Holiday Backers Point to Big Picture

Supporters emphasize the indirect economic effects of repatriation.

Faced with criticism that companies didn’t use proceeds of a 2004 tax holiday to create jobs directly, advocates for repeating the policy are emphasizing the indirect economic effects of repatriating more than $1 trillion.

Whether the money is used for hiring or stock buybacks, “I would much rather have their foreign earnings here rather than in, say, France,” said Kenneth Kies, a tax lobbyist at the Federal Policy Group in Washington whose clients include Microsoft Corp. and Pfizer Inc.

Those companies, along with Apple Inc., Google Inc., and Qualcomm Inc., are part of a coalition urging Congress to temporarily reduce the tax rate on profits held overseas. They want a repeat of a 2004 law that let companies pay 5.25 percent, instead of 35 percent, when they bring that cash to the U.S.

A flurry of studies and legislative activity over the past few weeks has brought increased attention to the proposed repatriation tax break. Lawmakers from both parties are trying to position the repatriation holiday as a tonic for the ailing economy. The proposal hasn’t advanced in Congress because of Democratic opposition, concerns about its cost to the government and the experience after the 2004 holiday.

Opponents, including Democratic Senator Carl Levin of Michigan, have complained that companies used the proceeds of the 2004 holiday to buy back stock instead of creating jobs. He released a report Oct. 10 showing that the 15 corporations that brought back the most money after the 2004 holiday cut a combined total of almost 21,000 jobs.

‘Embarrassing Failure’

“It’s very clearly understood that it failed, and beyond that, it was an embarrassing failure,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a Washington group that advocates for low-income families.

“To say that over $300 billion came back into the American economy and it had no impact is difficult to swallow,” he said. “What they’re trying to target specifically is that did people spend it the way we wanted them to spend it.”

Laura D’Andrea Tyson, chair of the Council of Economic Advisers under President Bill Clinton, released a study yesterday estimating that a repatriation tax break would cause companies to bring home $1 trillion, add between $178 billion and $336 billion to the gross domestic product and generate as many as 2.5 million jobs. A study done for the U.S. Chamber of Commerce in September showed higher growth and job-creation projections.

Investment Argument

Tyson is on the board of directors of Eastman Kodak Co., a member of the coalition of companies seeking the repatriation holiday. She released the study in conjunction with the New America Foundation, a Washington group that studies policies affecting the information-age economy. The chairman of its board of directors is Eric Schmidt, executive chairman of Google.

“This argument comes because their main argument has so utterly failed,” he said.

‘Wet Puppy’

Edward Kleinbard, a law professor at the University of Southern California, said the companies seeking a repatriation holiday often portray their offshore profits “as a wet puppy” waiting to be let back in the house.

That’s untrue, he said, because companies’ assets outside the U.S. are often held in dollar-denominated securities.

“The money, in fact, to that extent, is already in the United States economy,” he said. “The route is a little bit indirect.”

Kenneth Serwin, Tyson’s co-author of the repatriation study, said the indirect route isn’t as influential in the economy as higher stock prices spurred by buybacks. Increased consumption by shareholders will spur economic growth, he said.

As the economic argument among experts continues, the legislative path for a repatriation holiday remains uncertain.

Companies are trying hard. The coalition and its members have more than 160 lobbyists working on the issue, including at least 60 who worked for a sitting member of the House or Senate, according to data compiled by Bloomberg News.

Bipartisan Proposal

On Oct. 6, Senators Kay Hagan, a North Carolina Democrat, and John McCain, an Arizona Republican, released a bill that would set a maximum tax rate of 8.75 percent with a rate as low as 5.25 percent for companies that expand their payrolls by at least 10 percent.

Within the next week, Senators Charles Schumer and Mark Kirk will unveil legislation that would institute a tax holiday for repatriated offshore profits and dedicate the proceeds to infrastructure investment, Kirk said in an interview earlier this week.

The Illinois Republican, who has been working with New York’s Schumer, who is the third-ranking Senate Democrat, to craft the legislation, said he is trying to win support from other Republicans.

‘Big Picture’ Debate

Kirk said he and Schumer want their proposal to fit into the “big picture” debate over jobs and the federal budget, adding that they hoped it was something the so-called supercommittee charged with finding at least $1.2 trillion in budgetary savings might consider.

“It clearly would add to the Treasury and the cash flow of the United States,” he said.

The Joint Committee on Taxation, the official scorekeeper for tax legislation in Congress, disagrees. A repeat of the 2004 holiday would cost the government $78.7 billion in forgone revenue over the next decade, in part because companies would continue shifting profits overseas and holding them there in anticipation of another tax holiday, the panel said.

That revenue estimate has dampened support for the proposal, as has the Obama administration’s opposition to a stand-alone holiday. Furthermore, Republicans such as Ways and Means Committee Chairman Dave Camp, a Michigan Republican, have said they prefer addressing offshore profits as part of a broader overhaul of the tax code.

Bloomberg News

Copyright 2016 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Treasury & Risk

Treasury & Risk is an online publication and robust website designed to meet the information needs of finance, treasury, and risk management professionals. Our editorial content, delivered through multiple interactive channels, mixes strategic insights from thought leaders with in-depth analysis of best practices, original research projects, and case studies with corporate innovators.